The US dollar has enjoyed a reprieve in recent weeks, rising against all major currencies and regaining its status as a safe-haven asset in times of market stress. But analysts warn that is likely not to last long. The dollar posted its worst performance in more than 50 years in the first half of 2025 after US President Donald Trump rolled back the “Emancipation Day” tariffs announced in April, shaking confidence in US assets. Morgan Stanley said in an August research note that the dollar index, which tracks performance against a basket of major currencies, is down almost 10% by 2025, ending a “15-year bull cycle.” However, its fortunes changed when the Iran war began. The United States is a major oil exporter, and the price of oil is determined in dollars, so the soaring WTI crude oil price has increased demand for its own currency. The index is currently just below its 10-month high. While other traditional safe-haven currencies such as the Japanese yen have weakened, the dollar has also shown defensive characteristics. GBP= JPY=,EUR= Mt. 1 million Since the Iran conflict, the dollar has appreciated against the pound, euro, and yen. “Geopolitical tensions in the Middle East have once again strengthened the role of the US dollar as the primary safe-haven currency,” HSBC foreign exchange analysts said in a note on Thursday. “This is a reminder that this hasn’t really changed at all compared to the prevailing narrative almost a year ago.” European countries’ heavy reliance on imports once again showed their vulnerability to energy price shocks from Middle East wars, with both the pound and euro falling. The United States is now more self-sufficient in oil production and more protected from disruptions in the Strait of Hormuz, a key oil and gas shipping route that Iran has shut down. HSBC analysts added in a note that there are reasons not to fully embrace a stronger dollar again, especially since the drivers for dollar strength in 2022 no longer exist. Other analysts also say the dollar’s recovery will be short-lived. “The underlying issues that contributed to the weakness prior to the recent Middle East wars have not been resolved,” Russ Mould, investment director at AJ Bell, told CNBC. “These include a capricious US administration with difficult to read strategy, large budget deficits, political pressure on central bank independence, and frankly all the characteristics that investors would expect from emerging markets rather than developed markets.” He added that while gold has yet to rise since the conflict began, the macro forces behind the yellow metal are still present, including rising Western government debt, especially as the US “spends freely on the war effort.” XAU= 1M Mountain Gold prices have remained almost flat since February 28, when the Iran conflict began. The dollar was supported by oil prices in Monday’s trading, with Brent crude falling to $95 a barrel, indicating some decline from recent highs. A key question for investors is how long the dispute will last. “We expect the dollar to be strong as long as the crisis continues,” Jason da Silva, investment director at private bank Arbuthnot Latham, told CNBC. “However, we expect the dollar to continue to weaken once the situation normalizes. The dollar remains overvalued, and we see this as the real driver of long-term returns for the dollar over the long term.”
